Tax-Exempts Suffer Biggest Monthly Drop This Year: Muni Credit
Tax-exempt bonds had their worst monthly returns of 2010 as rising U.S. Treasury yields and record state and local fixed-rate debt sales sparked withdrawals from mutual funds investing in municipal securities.
Tax-free holdings lost 2.29 percent in November, the third consecutive monthly drop and the longest slide since 2004, according to the Bank of America Merrill Lynch Municipal Master Index, which accounts for price changes and interest income. Mutual funds investors pulled $5.4 billion of muni assets within two weeks last month, according to Lipper FMI, a research firm.
States and municipalities borrowed about $55.6 billion last month, the most since at least 2003, according to data compiled by Bloomberg. About $53.7 billion was sold in October, the second-most on record. The volume jump fed into price declines as mutual funds had to sell holdings to cover investor redemptions, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
“First it’s a little bit of supply shock,” LeBas said. “Then that coincides with withdrawals from funds, which triggers forced selling, which triggers another round of declines.”
Mutual-fund investors unloaded $2.27 billion of municipal assets in the week ended Nov. 24, according to Lipper. It followed a week in which investors withdrew more than $3.1 billion, the most since January 1992, according to Tom Roseen, senior analyst at Lipper in Denver.
Yields on top-rated tax-exempts due in 10 years climbed about 55 basis points, or 0.55 percentage point, from Nov. 8 to Nov. 18, according to a Bloomberg Valuation index. Yields rose to 2.8 percent yesterday from 2.53 percent on Oct. 29. November’s total return is the worst since a 2.51 percent loss in October 2009, Merrill’s index shows.
Yields on 10-year Treasuries surged from a monthly low of 2.46 percent on Nov. 4 to a high of 2.96 percent on Nov. 16, Bloomberg data show. Treasuries generated losses for a second straight month, losing 0.68 percent.
Both Build America and comparably rated corporate bonds of a similar maturity recorded losses for a third straight month. The Build Americas returned minus 2.15 percent while the company debt had minus 0.88 percent, according to Merrill indexes. Build America yields rose about 21 basis points last month to 6.07 percent yesterday, according to a Wells Fargo index.
Chicago, the nation’s third most-populous city, is selling more than $800 million this week. Chicago was offering 30-year Build Americas to investors yesterday at a yield spread of 320 basis points above 30-year Treasuries, according to a person with direct knowledge of the deal. That would be a yield of about 7.33 percent, based on Treasury rates yesterday.
The issue, which prices today, had been postponed last month as the city waited for “a more opportune time to access the lowest possible rates,” Pete Scales, a spokesman for Chief Financial Officer Gene Saffold, said at the time.
Moving the deal may not have benefited the city, which will likely pay more in spread, said Richard Saperstein, who helps oversee $4 billion of municipal bonds for the Treasury Partners Practice at HighTower Advisors LLC in Chicago.
“They’ve encountered this year-end problem where we have a large supply of BABs and a steepening of the yield curve and it’s having a dual impact,” he said.
The extra yield investors demand for Build Americas above 30-year Treasuries was 195 basis points yesterday, down 1 basis point from a three-month high on Nov. 29, according to the Wells Fargo index. The daily average for the week of Nov. 8, when the Chicago deal was originally slated, was about 184 basis points, Bloomberg data show.
Yields on 30-year Treasuries have declined in the last two weeks to 4.11 percent yesterday from 4.29 percent on Nov. 17, Bloomberg data show.
Chicago’s Scales wasn’t available for comment yesterday.
Munis have returned 4.38 percent since the start of the year, with Treasuries bringing in 7.85 percent, Merrill indexes show. Build Americas have gained 10.2 percent, with the corporate index providing 12.8 percent.
The four asset classes have all rallied in the last week, and that’s likely to continue as the European debt crisis and tensions in Asia lead investors to seek less risky assets, LeBas said.
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